If you’re looking into investing in real estate, you need to have many members on your investment team. One of these team members could be a hard money lender that will help you act on your real estate investments quickly and efficiently. A hard money loan is a short-term loan secured by real estate that you’ll use as an income source. A hard money lender is a private investor who lends hard money loans. Before choosing a hard money lender, here’s a list of good questions to ensure you’re dealing with the right person.
What Is Your Experience?
Experience level is probably the most obvious question when applying for a hard money loan. Get an idea of how many years a hard money lender has been funding and how many transactions they’ve completed. Ask about their reputation to ensure they have a good reputation for doing business with others.
Are You a Broker or Direct Lender?
The next question you’ll want to ask is if they’re lending the money outright or do they work as a broker for the person that will ultimately loan out the money. This question can help determine the motivation of the individual you are dealing with in a hard money loan. Are they interested in the best rate, or do they only care about their commission? While most lenders are honest, the industry has its share of scam artists, so know who you’re dealing with from the start.
What Are the Interest Rates?
Whether it’s a standard loan, credit card, or hard money loan, the interest rate is one of the most critical aspects. Even though rates will vary depending on your situation, understanding their interest rates will give you a place to start. In addition, make sure you know what points they charge to get the complete picture.
Are There Any Other Fees?
Fees can be a hidden way for lenders to make a good chunk of money. These fees can include loan servicing fees and application fees, among others. Have the lender provide a rate and fees sheet that delineates all fees they impose.
Will There Be Early Pay Off Penalties?
Next up, you’ll want to know if the lender imposes any prepayment penalties. It is not unreasonable for a lender to expect to make the total amount of money from the loan they give you, including all the interest. Thus, they may charge a penalty for paying off your loan early to recoup some of the lost interest.
How Much Time Does it Take to Fund the Loan?
When investing in real estate, time is most definitely of the essence. You might be able to put together a great deal, but if you can’t close it in time, you may lose the opportunity. The time it takes to fund the loan can make or break a real estate deal. Get an idea of their average delivery time and how it differs between the types and sizes of loans.
What Are the Length of Loan Term Limits?
Hard money loans are, by their nature, short-term loans, often in the range of six to nine months. This will, by and large, depend on the type of loan you’re looking for, such as a fix-and-flip type loan, rental property, or commercial loan.
What Are the Terms of Payment?
You’ll want to ask what the terms of payment are. Your situation may be such that you would like to pay the loan off, in its entirety, at the end of the term. However, while typical institutional lenders will almost exclusively require monthly payments, a private hard money lender may be more flexible. You could make interest-only payments and then a balloon payment at the end. Or, they may be willing to wait until the end of the term and take the payment in its entirety, principal and interest. This scenario is relatively common for a fix-and-flip type situation.
Are There Down Payment Requirements?
Most of the time, lenders will want you to have a stake in the investment as a down payment, even more so if you’re a new client for them. Typically, a real estate investor will have some cash on hand, maybe just not enough for the deal in its entirety. Often, investors have much of their money tied up in property, leaving less liquidity for other investments. This is where a hard money lender comes in handy.
What Are the Different Types of Loans Offered?
There’s a different loan for each type of real estate project, including fix and flip loans, bridge loans, new construction loans, long-term rental loans, and commercial loans. Whichever type of real estate investment you want, make sure the hard money lender deals in that transaction.
What Is the Process for Disbursing Funds for Renovations?
If you’re looking at a hard money loan to do renovations or a fix-and-flip type of transaction, time is everything. Once a deal is found, an investor needs to move quickly to fund the project and get the timing right on the renovation. Another important consideration is if the loan will cover only the purchase price or both the purchase price and the renovation costs. Profitability depends primarily on the speed at which the process moves, so ensure you understand this aspect.
What Is the Minimum FICO Score Accepted?
While institutional lending depends greatly, if not exclusively, on credit checks and FICO scores, they’re only one aspect of the approval process for hard money lenders. Hard money lenders will often look at the deal itself as the main, or even only, deciding factor. Even if your credit score is less than optimal, a hard money lender may be willing to work with you if you can put together a great deal.
For more information on hard money loans or fix-and-flip loans, contact the experts at Titan Funding. We’re available at 855-928-0737 Monday through Friday from 9 a.m. to 6 p.m. or via our secure online contact form 24 hours a day, seven days a week. Titan Funding is conveniently located at 2701 NW Boca Raton Blvd., Suite 105 in Boca Raton, Florida.
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